loaning Money To Stop Foreclosure
I'm considering loaning money to someone to purchase an investment
house. The loan will be 65% of the house's appraised value, and the
borrower will not be living in the house (he intends to fix it up and
resell it).
Question: In the unlikely event the borrower declares bankruptcy, will
I still be able to foreclose on the house?
_There may be a way to avoid loss, at least in some places. About 10 years
ago I sold a house and took back a mortgage ("vendor take back"). The lawyer
set it up so that, if the buyer later stopped making the payments and
declared bankruptcy, I would still get the house back. This was in
California. Maybe it is different in the case of lending the money to
someone to buy a house rather than a vendor take back mortgage, I do not
know. I cannot remember the details, but it may still be possible to protect
yourself. Ask a lawyer.
_More or less, yes you can. However, there are some things to
understand about a bankruptcy.
When a person files a bankrupcy (which is in federal court), all legal
actions the person is involved in are stayed until the bankruptcy is
complete. At the completion of the bankruptcy the bankruptcy judge
will issue a final order, which will include orders to the judges of
the other cases how they must decide the cases. In other words, if you
foreclosure and the borrower files a bankruptcy, the foreclosure
action is essentially removed from the local court and thrown into the
bankruptcy court. Your foreclosure will still be successful, but there
may be a delay because everyone has to wait for the final word from
the bankruptcy judge.
Note that in a bankruptcy there are two classes of creditors: secured
and unsecured. Secured parties are allowed first dibs on the
collateral, i.e., if you have a first mortgage on the property you get
the proceeds from the sale by the receiver in bankruptcy. After all
the secured creditors get whatever their collateral brings, the rest
of the debtor's assets (including any surplus that the mortgaged
property brings above the mortgage amount) are shared by the unsecured
creditors.